Retirement planning is no small task. Now, you may have to add your longer-living parents’ retirement shortfalls to your own list of concerns. That makes income-generating annuities worth a closer look.
There’s a potential retirement crisis in the offing and it’s not necessarily your own. As you map out your plans for financial security in an uncertain future, you should also be thinking about your parents.
Why? Because people are living longer—and it’s surprising even them.
According to the Social Security Administration, men who reach 65 today can expect to live, on average, to 84 years or longer. Bump that even higher for women, who, on average, will see at least their 86th birthday. And, as SSA reminds us, those are just averages. One out of every four 65-year-olds today will live past age 90. One of 10 will reach 95 or older. Living longer can mean added health care costs, including sometimes-pricey in-home services, that may stretch an entire family’s savings.
"There's a growing need for income that is guaranteed to last a person's entire life, as people are living longer and are concerned about outliving their assets," agrees Matt Sadowsky, president for The Insurance Agency of TD Ameritrade.
Many Gen Xers and the Ys right behind them already know these longevity statistics and are factoring them into retirement planning. Younger Boomers, too. Their parents, however, didn’t count on living this long, and many of them are ill-prepared. Are your parents among the 13% of Americans who actually have long-term health care insurance?
They may be able to subsist on Social Security and/or a nice pension with some supplementary income through dividends or withdrawals from Individual Retirement Accounts (IRAs). But what happens when Alzheimer’s, mobility issues, or some other health curveball barrels in? What happens if the value of a home or a stock portfolio goes south just when those assets are needed most? That’s when the real financial pain begins. Long-term care can be very, very expensive.
Let’s look at the hard, cold facts about long-term care: It can eat up all your assets in no time at all.
Like real estate, the prices depend on location, location, location. The costs for virtually identical long-term care insurance can vary as much as 90% from one company and city to another, says the American Association for Long-Term Care Insurance.
In Chicago, the average cost of in-home health care will set you back $22 an hour, according to the Federal Long Term Care Insurance Program offered to federal and U.S. Postal Service employees. Just two years of that and the total bill rings up quickly to $69,000 and counting—and that’s for only six hours per visit, five days a week. Someone else has to stand in the rest of the time.
It’s a little cheaper in Newport News, VA, where the per-hour price is $18, or $56,000 over two years.
If Pop were put in a skilled nursing home in Chicago, the average per-day price tag is $186, times two years is equal to $136,000. In Newport News, it’s pricier per day in a nursing home, at $198, or $145,000 over the same period.
Let’s take it to New York City, where the per-hour cost for in-home care is smack dab in the middle at $20. But if a nursing home is needed, the prices spiral to $462 daily. Two years of that and the tab reaches $337,000.
Not all families can afford the prices in this small sample. Medicare doesn’t cover hospital or nursing home stays over 100 days, so don’t count on that. And Medicaid is available only if your assets are next to nothing.
--Note: Regional cost data based on Federal Long Term Care Insurance Program calculator; all costs are based on the 2013 average (agency uses John Hancock Cost of Care Survey).
Even if long-term health insurance has been purchased, it’s likely that the costs are skyrocketing and the policies are getting tighter. That’s because the insurance industry itself didn’t always factor in "persistency." The industry was expecting more LTC policies to lapse. It wasn't expecting that people would keep paying the premiums and keep them in force to the extent that they did. So as a result, more people are cashing in the insurance when they needed long-term care and it has had an effect on the industry. For example, Genworth, the largest seller of long-term coverage, is scrambling to shore up reserves and stem billion-dollar losses as policies written decades ago are now dragging it into a deep hole.
Income-paying annuities may be a piece of retirement planning worth a closer look.
Annuities that were set up to generate income for the “nice-to-have things” in retirement like vacations, hobbies, or visits with grandchildren can instead be used to cover health care costs if needed, Sadowsky says.
There’s also been some uptick in sales of the so-called “nursing-home annuity.” This is a Medicaid-compliant, single-premium immediate annuity, or SPIA, that’s an emergency purchase when long-term care is needed. In this case, the assets are no longer accessible by the individuals. Instead, those assets become the property of the insurance company in exchange for a guaranteed lifetime income stream. So the individuals essentially forfeit the asset, which should bring their total net worth down low enough to qualify for Medicaid. Even though they don't still hold the assets that went into the annuity, they get some benefit from them.
Just keep in mind that the best family time may be spent asking some tough questions about multi-generational retirement planning, including meeting long-term health care needs.
After all, a birthday cake crowded with candles is a good thing; financial surprises in our golden years are not.
Whether you’re staring down retirement or still years away, exploring guaranteed income from a fixed or variable annuity may make sense for your planning.
The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.
Investment and Insurance Products: Not FDIC Insured * No Bank Guarantee * May Lose Value
Insurance products/services are offered through The Insurance Agency of TD Ameritrade, LLC. Brokerage services provided by TD Ameritrade, Inc., member FINRA/SIPC. The Insurance Agency of TD Ameritrade, LLC and TD Ameritrade, Inc. are both wholly owned subsidiaries of TD Ameritrade Holding Corporation.
The annuity products offered are issued by separate and unaffiliated third-party insurance carriers. TD Ameritrade and these companies are not responsible for each other's policies or services.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.